On Thursday August 25, 2011, the first page of the New York Times had a lead article entitled "U.S. Considering Refinance Plan for Mortgages". The article talks about how the Obama administration is considering action to strengthen the housing market by allowing homeowners with government-backed mortgages to refinance at today's 4% interest rate. This would ostensibly lower the homeowner's mortgage payment and allow them to spend the interest rate savings to boost the economy. The following is that article in its entirety:

One proposal would allow millions of homeowners with government-backed mortgages to refinance them at today's lower interest rates, about 4 percent, according to two people briefed on the administration's discussions who asked not to be identified because they were not allowed to talk about the information.

A wave of refinancing could be a strong stimulus to the economy, because it would lower consumers' mortgage bills right away and allow them to spend elsewhere. But such a sweeping change could face opposition from the regulator who oversees Fannie Mae and Freddie Mac, and from investors in government-backed mortgage bonds.

Administration officials said on Wednesday that they were weighing a range of proposals, including changes to its previous refinancing programs to increase the number of homeowners taking part. They are also working on a home rental program that would try to shore up housing prices by preventing hundreds of thousands of foreclosed homes from flooding the market. That program is further along - the administration requested ideas for execution from the private sector earlier this month.

But refinancing could have far greater breadth, saving homeowners, by one estimate, $85 billion a year. Despite record low interest rates, many homeowners have been unable to refinance their loans either because they owe more than their houses are now worth or because their credit is tarnished.

Exactly how a refinancing plan might work is still under discussion. It is unclear, for example, whether people who are delinquent on their mortgages would be eligible or whether lenders would administer it. Federal officials have consistently overestimated the number of households that would be helped by their various housing assistance programs.

A working group of housing experts across several federal agencies could recommend one or both proposals, or come up with new ones. Or it might decide to do nothing. Investors may suspect a plan is in the works. Fannie and Freddie mortgage bonds had been trading well above their face value because so few people were refinancing, keeping returns on the bonds high. But those bond prices dropped sharply this week.

Administration discussions about housing proposals have taken on added urgency this summer because the housing market is continuing to deteriorate. On Wednesday, the government said that prices of homes with government-backed mortgages fell 5.9 percent in the second quarter from a year earlier, the biggest decline since 2009. More than one in five homeowners with mortgages owe more than their homes are worth. Some analysts are now predicting waves of foreclosures and a continuing slide in home prices. There is not much time to help the market before the 2012 election, and given Congressional resistance to other types of stimulus, housing may be the only economic fix in reach. Federal programs to assist homeowners have been regarded as ineffective so far, and they are complex.

"We are looking at trying to encourage more participation in all of the programs, including those that help with refinancing," said Phyllis Caldwell, who oversees housing policy at the Treasury Department.

Some economists say that with housing prices and interest rates at affordable levels, only fear is keeping consumers out of the market. Frank E. Nothaft, the chief economist at Freddie Mac, said the federal action could instill confidence.

"It almost seems to me you want to have some type of announcement or policy, program or something from the federal government that provides that clear signal that we are here supporting the housing market and this is indeed a good time to really consider buying," Mr. Nothaft said.

"The refinancing idea has been around since at least 2008, but proponents say the recent drop in interest rates to below 4 percent may breathe new life into the plan. This is the best stimulus out there because it doesn't increase the deficit, it accomplishes monetary policy, and it reduces defaults in housing," said Christopher J. Mayer, an economist at the Columbia Business School. "So I think this is low-hanging fruit." Mr. Mayer and a colleague, Glenn Hubbard, who was chairman of the Council of Economic Advisers under President George W. Bush, proposed an early version of the plan.

The idea is appealing because it would not necessarily require Congressional action. It also would not tap any of the $45.6 billion in Troubled Asset Relief Funds that was set aside to help struggling homeowners. Only $22.9 billion of that pool has been spent or pledged so far, and fewer than 1.7 million loans have been modified under federal programs. But Andrea Risotto, a Treasury spokeswoman, said whatever was left would be used to reduce the federal deficit.

A mass refinancing plan would spread the benefits of the Federal Reserve's most important economic policy response, low interest rates, to more people. As of July, an estimated $2.4 trillion in mortgages backed by Fannie and Freddie carried interest rates of 4.5 percent or higher.

The two prevailing ideas, lowering rates on mortgages and converting houses owned by government entities like Freddie and Fannie into rentals and other uses, have somewhat different pockets of support. Investment firms would like to participate in the rental program, especially if the government lends them money to participate. For the most part, banks prefer the refinancing plan. There are many high-ranking proponents of the refinancing plan. Joseph Tracy, a senior adviser to the chairman of the New York Federal Reserve, has circulated a presentation in support of the plan. And Richard B. Berner, who recently joined the Treasury Department as counselor to Secretary Timothy F. Geithner, argued in favor of a blanket refinancing in his previous job as chief United States economist for Morgan Stanley. The proponents say the plan carries little risk because the mortgages are already guaranteed by Fannie Mae and Freddie Mac. They also say it makes those loans less likely to go into default and ultimately foreclosure. But the plan has some drawbacks. Some officials fear that promoting mass refinancings today could spook investors and make borrowing more expensive, for both homeowners and the federal government, in the future.

The government has already encouraged some refinancing through the Federal Housing Administration and through Fannie and Freddie, but participation is limited. For example, the Home Affordable Refinance Program excludes homeowners who owe more than 125 percent of the value of their house. To spur more refinancing, the government may decide to encourage Fannie and Freddie to lift such restrictions.

But government officials cautioned that Fannie and Freddie do not do the administration's bidding, even though they are essentially owned by taxpayers. Edward J. DeMarco, who oversees the companies as acting director of the Federal Housing Finance Agency, has voiced concerns about any plan that might cost the companies money, according to the two people briefed on the discussions. "F.H.F.A. remains open to all ideas that provide needed assistance to borrowers" while minimizing the cost to taxpayers, Mr. DeMarco said in a written statement. A broader criticism of a refinancing expansion is that it would not do enough to address the two main drivers of foreclosures: homes worth less than their mortgages, and a sudden loss of income, like unemployment. American homeowners currently owe some $700 billion more than their homes are worth.

Real Estate Market Commentary - December 2011

by Peter L. Zachary, MAI, MRICS

I was listening to the news the other morning and heard that the jobs market and real estate market were recovering. On December 22, 2011, the New York Post had an article on page 36 entitled "Room for Hoorahs - Signs Pointing to Possible End of Housing Slump". The article stated:

"After a five-year free fall that wiped out more than half the value of American homes, Wall Street cheered hopeful signs that the nation's housing market may finally be on the mend. New data yesterday showed sales of existing homes rose 4 percent in November alone, reaching a 10-month high. Sales surged 9.8 percent in the Northeast, according to the National Association of Realtors.

The uptick followed surprisingly strong data on Tuesday showing a 9 percent jump in new housing starts in November.

Analysts were also excited yesterday by the rosiest outlook in two years from bellwether home builder KB Home, which reported a 38-percent jump in new orders for November, its best net gain since 2009.

'The housing market has at least bottomed and is bracing for a plus year in 2012,' said senior economist Steve Blitz at ITG Investment Research. He called KB's report 'very impressive and beat Wall Street's expectations across the board.'

Another economist applauded the upbeat sales, noting that a separate outlook for a stronger December, along with cheaper prices, amounted to a 'trifecta win'.

'Sales in November reached the highest mark in 10 months and are 34 percent above the cyclical low point in mid-2010,' said NAR economist Lawrence Yun. 'A genuine sustained sales recovery appears to be developing.'"

I consider the above article to be a public relations pitch by the National Association of Realtors (NAR). You can't blame them for trying to put a positive spin on the housing market, but I don't think we are there yet.

A more realistic article appeared in the New York Times on that same day, December 22, 2011, entitled "Signs Point to Economy's Rise But Experts See a False Down" stated:

"As the fourth quarter draws to a close, a spate of unexpectedly good economic growth since the recovery started in 2009, causing a surge in the stock market and cheering economists, investors and policy makers.

In recent weeks, a broad range of data - like reports on new residential construction and small business confidence - have beaten analysts' expectations. Initial claims for jobless benefits, often an early indicator of where the labor market is headed, have dropped to their lowest level since May 2008. And prominent economics groups say the economy is growing three to four times as quickly as it was early in the year, at an annual pace of about 3.7 percent.

But the good news also comes with a significant caveat. Many forecasters say the recent uptick probably does not represent the long-awaited start to a strong, sustainable recovery. Much of the current strength is caused by temporary factors. And economists expect growth to slow in the first half of 2012 to an annual pace of about 1.5 to 2 percent."

The slow growth in the first-half of 2012 is expected if the Federal government does not pass about $150 billion in relief to the middle class and unemployed.

"'Unfortunately, I think we're going to see a slowdown over the course of next year,' Ethan Harris, co-head of global economics research at Bank of America Merrill Lynch, told reporters last week. 'Not only do we have the European crisis spilling over and hurting U.S. trade and confidence," he said, but the United States economy also faces 'homegrown shocks.'

There are two reasons for the renewed pessimism. First, economists say that temporary trends increased growth in the fourth quarter and may not continue into next year. Second, the economy faces significant headwinds in 2012: some from Europe's long-lingering sovereign debt crisis, and some from domestic cutbacks beyond the control of President Obama, whose campaign would like to point to a brightening economic picture, not a darkening one. Even the Federal Reserve is predicting that the unemployment rate will remain around 8.6 percent by the time voters go to the polls in November.

For now, Democrats and Republicans remain at loggerheads, blaming each other for the uncertainty around the payroll tax rates and aid for the unemployed.

'A two-month extension creates uncertainty and will cause problems for people who are trying to create jobs,' John Boehner, Republican of Ohio and speaker of the House, said on Monday.

'The clock is ticking. Time is running out,' President Obama said at a White House news briefing on Tuesday. 'One of the House Republicans referred to what they're doing as 'high-stakes poker'. He's right about the stakes, but this is not poker. This is not a game.'"

I'm afraid our leaders are just in business to make a paycheck for themselves and are not interested in solving the country's problems. Things appear to be hopeless.

The October 19, 2011 issue of the New York Times had a front page article entitled "Gloom Grips Consumers; It May Be Home Prices". The article talks about a man named Ernest Markey of Orlando, Florida. Due to the poor economy, he lost his stone-cutting business in 2009 and then sold his home for $500,000 less than it was worth at the peak of the housing market. They moved to a smaller home in a less affluent neighborhood and gave up two new cars and bought a used car. They are surviving but they do not expect that they will ever recover financially from the loss of the equity in their home. The third paragraph of this article sums up everything Ernest and almost all Americans feel. It stated: "The United States has a confidence problem: a nation long defined by irrational exuberance has turned gloomy about tomorrow. Consumers are holding back, businesses are suffering and the economy is barely growing."

"There are good reasons for gloom - incomes have declined, many people cannot find jobs, few trust the government to make things better - but as Federal Reserve chairman, Ben S. Bernanke, noted earlier this year, those problems are not sufficient to explain the depth of the funk. That has led a growing number of economists to argue that the collapse of housing prices, a defining feature of this downturn, is also a critical and underappreciated impediment to recovery. Americans have lost a vast amount of wealth, and they have lost faith in housing as an investment. They lack money, and they lack the confidence that they will have more money tomorrow. Many say they believe that the bust has permanently changed their financial trajectory. ‘People don't expect their home to regain value, and that's really led to a change in consumer attitudes about the economy that we've just never seen before,' said Richard Curtin, a professor of economics at the University of Michigan who directs its Survey of Consumers. The latest data from the survey, released Friday by Thomson Reuters, shows that expectations for economic growth have fallen to the lowest level since May 1980."

The article further discusses how economists are starting to spend time on the relationship between housing prices and consumer spending. It stated:

"Economists have only recently devoted serious study to how a decline in housing prices affects consumer spending, not least because this is the first decline in the average price of an American home since the Great Depression. A 2007 review of existing research by the Congressional Budget Office reported that people reduce spending by $20 to $70 a year for every $1,000 decline in the value of their home. This "wealth effect" is significantly larger for changes in home equity than in the value of other investments, such as stocks, apparently because people regard changes in housing prices as more likely to endure. A recent paper by Karl E. Case, an economics professor at Wellesley College, and two co-authors estimated the decline in home prices from 2005 to 2009 caused consumer spending to be $240 billion lower in 2010 than it otherwise would have been. That figure is equal to about 1.7 percent of annual economic activity, enough to be the difference between the mediocre recent growth and healthy growth. And it does not include all the other effects of the housing crash, including the low level of new home construction, that are also weighing on the economy."

This article in the Times talks about the travails of small business. It talk about Milcarsky's Appliance Center in Longwood, Florida which went from 26 employees 3 years ago to 12 employees today. The article states:

"It remains the prevailing view of economic policy makers that economic activity will eventually return to the same trajectory as before the recession. Mr. Bernanke and others have said that they see no evidence of any permanent change in the economy. Previous bouts of economic pessimism, as in the early 1980s and early 1990s, went away once growth picked up."

However, this is a very hard pill to swallow in these trying economic times. One of the basic principles of appraising is the principle of change. Things are always changing and therefore values are always changing. Unfortunately change may occur at such a slow rate that it is not discernable. Thus pessimism rules in today's market.

Real Estate Market Commentary - September 2011

by Peter L. Zachary, MAI, MRICS

The month of September started out with some bleary news about job growth. The New York Times had a front page article on September 3, 2011 entitled "Zero Job Growth Latest Bleak Sign for U.S. Economy Jobless Rate Still 9.1% and White House says it May Stay High for Months" and the New York Post had on its front page "None, Zero, Zilch - That's How Many Job Were Created in the U.S. Last Month". President Obama's picture was below the word "Zilch".

In my opinion job growth and housing prices are intertwined. Without job growth there will be no increases in housing prices. The New York Times article stated the following. "August brought no increase in the number of jobs in the United States, a signal that the economy has stalled and that inaction by policy makers carries substantial risk."

The government report on hiring, released on Friday, prompted another round in a relentless diminution of economic expectations. The unemployment rate, at 9.1 percent, did not change last month, and the White House said it was expected to stay that high through at least 2012.

Some economists said the possibility of a double-dip recession was increasing.

"As long as payrolls are weak, you will continue to hear cries of not just recession risk but cries that the United States is in a recession and we just don't know it," said Ellen Zentner, the senior United States economist for Nomura Securities.

Even if the economy does not contract, the projected growth rate is so slow it will not be enough to absorb new people entering the labor market, much less the unemployed.

"We have virtually the same number of jobs as we did in January 2000," said Patrick J. O'Keefe, the director of economic research at J. H. Cohn, an accounting firm. "Were jobs to continue to grow at the 2011 monthly average, it would take more than four years to return to the prerecession employment level."

The problem is less that companies are laying people off than that they are not hiring. Consumers and employers alike seem almost frozen in place, with many economists saying that they seemed paralyzed by uncertainty about the future after the brinksmanship of the debt ceiling debate, the ensuing cut in the United States credit rating by Standard & Poor's, stock market whiplash and more bad news from Europe."

On September 21, 2011, The Wall Street Journal had a front page article entitled "Home Forecast Calls for Pain - Prices to Stumble Through 2015, Economists Say, Weighing Down Recovery". This is an important article for the real estate market, because it will summarize what has happened and makes a projection for the future.

It stated: "Economists, builders and mortgage analysts are predicting the weakened U.S. economy will depress housing prices for years, restraining consumer spending, pushing more homeowners into foreclosure and clouding prospects for a sustained recovery.

Home prices are expected to drop 2.5% this year and rise just 1.1% annually through 2015, according to a recent survey of more than 100 economists to be released Wednesday. Prices have already fallen 31.6% from their 2005 peak, as measured by the Standard & Poor's Case-Shiller 20-city index.

If the economists' forecast is accurate, it means housing faces a lost decade in which home prices recover just a fraction of what was lost between 2005 and 2015, leaving millions of homeowners with little, if any, equity in their homes. The survey was conducted for MacroMarkets LLC, a financial technology company co-founded by Yale University economist Robert Shiller.

The housing bust has chilled consumer spending-the largest single driver of the U.S. economy-with eroding home equity contributing to the so-called reverse wealth effect that prompts people to spend cautiously because they feel poorer.

One in five Americans with a mortgage owes more than their home is worth, and $7 trillion of homeowners' equity has been lost in the bust. Homeowners' equity as a share of home values has fallen to 38.6% from 59.7% in 2005.

"With all of the economic turmoil, both domestic and international, there's not much that points to an improving housing market at any point in the near future," said Ara Hovnanian, chief executive of Hovnanian Enterprises Inc., the U.S.'s seventh-largest builder by deliveries.

While home prices aren't falling at anywhere near the pace of 2008, one worry is that even modest declines become self-reinforcing, pushing more homeowners underwater and exacerbating the downdraft caused by more foreclosures.

That, in turn, could prompt more credit tightening by lenders, further shrinking the pool of home buyers when more are needed to purchase bank-owned foreclosures.

The fallout from the housing bust hasn't been easy on Greg Rubin, owner of California's Own Native Landscape Design, a landscape contractor in Escondido, Calif.

With sales down by half from 2007, Mr. Rubin has reduced his work force to nine people from 21. He now does jobs for as little as $4,000 versus no less than $10,000 in the past.

With home values no longer increasing, the few people who are hiring Mr. Rubin are paying with cash savings instead of home-equity loans, substantially decreasing their purchasing power.

Also, Mr. Rubin said, home prices have been battered for so long that many people have stopped believing home improvements will increase the value of their property.

"There's this psychology that home prices are dropping independent of whatever improvements they make, so it's a lost cause to do them now," he said."

The above comments of Mr. Rubin are very telling. People don't think that home improvements will increase the value of their property, therefore they are not making home improvements. No home improvements, means fewer jobs.

This article also talks about how home prices are to drop 2.5% this year and rise 1.1% annually through 2015, according to a survey of economists with housing prices falling 31.6% from the 2005 peak. I don't know how these economists projected a 1.1% increase through 2015 with the economy being totally flat. Although in my opinion a 1.1% increase and a 1.1% decrease are virtually the same. It is not a significant percentage change.

Unfortunately, there is little good news on the horizon. Unless the United States can invent a way to turn water into gasoline, things will be difficult for everyone for some time.